The US dollar made a feeble start to 2026 on Friday after struggling against most currencies last year, while the yen steadied near a 10 month low as traders awaited economic data to predict how central bankers direct interest rates this year.

A narrowing interest rate difference between the US and other economies cast a shadow over the market last year, resulting in most currencies gaining sharply against the dollar, with the Japanese yen an exception.

Worries about the US fiscal deficit, a global trade war and concern about Federal Reserve independence took a toll on the greenback, and those issues are likely to linger into 2026.

The euro EUR= was steady at $1.1752 on the first trading day of the year after surging 13.5% last year, while sterling GBP= last bought $1.3473 following a 7.7% increase in 2025. Both clocked their steepest annual increases since 2017.

Markets in Japan and China were closed on Friday, making for light trading volume and little movement.

Dwindling Dollar dominance 

The dollar index =USD, which measures the US currency against six other units, was at 98.186 after registering a 9.4% decline in 2025, its biggest drop in eight years.

“We have seen the peak in dollar supremacy,” said Kyle Rodda, senior market analyst at Capital.com. Even so, there has not been two consecutive years of decline in the dollar index for two decades, he said.

“I believe its demise has been overstated and that the relative strength of the US economy will mean we see it bounce back this year.”

Economic data including US payrolls and jobless figures are due next week, providing clues on the health of the labour market and where the Fed’s policy rate may end up this year.

Much of the focus at the start of the year will be on who US President Donald Trump picks to be the next Fed chair as the term of current head Jerome Powell ends in May.

Investors are bracing for Trump’s pick to be more dovish and cut rates after the president repeatedly criticised Powell and the Fed for not cutting rates more swiftly or deeply.

Traders are pricing in two cuts this year compared to one projected by a currently divided Fed board.

“We expect that concerns around central bank independence will extend into 2026, and see the upcoming change in Fed leadership as one of several reasons why risks around our Fed funds rate forecast skew dovish,” Goldman strategists said.

Yem remains the exception

The yen JPY= was at 156.85 per US dollar after rising less than 1% against the greenback in 2025. It hovered close to the 10 month low of 157.90 touched in November that drew policymaker attention and raised the prospect of intervention.

The Bank of Japan hiked interest rates twice in last year but that did little to improve yen performance as the cautious pace frustrated investors, with speculators reversing significant long yen positions held in April.

There has also been growing investor unease about fiscal expansion under Prime Minister Sanae Takaichi, though she has sought to ease some of that concern.

Traders are pricing the next BOJ rate hike as being toward the end of 2026. Min Joo Kang, senior economist at ING, expects the most likely timing to be October.

“A further fiscal push could backfire on the economy, but the current government is expected to maintain its expansionary policy stance, posing a significant risk to the economy in 2026,” Kang said in a client note.

The Australian and New Zealand dollars started the new year on the front foot. The Aussie AUD= was 0.35% higher at $0.66975 after a nearly 8% rise in 2025, its strongest yearly performance since 2020.

The kiwi NZD= snapped its three-year losing streak with a nearly 3% gain last year. On Friday, it firmed a touch to $0.5761.